Don't use composite, use component at the least. DVD quality via software player is going to depend a lot on the quality of the DVD also. Some of my DVDs look great, some look like poop. WinDVD 7 looks a bit better than PowerDVD 6, but I'll try some of those tweaks and see if there's much difference. Also need to check out Creative's DVD player and see how that looks.
Upscaled DVD should look better though hands-down. One thing I can't stand about software DVD players is that they don't give you 1:1 1080, they give you a letterbox within a letterbox if you run 1:1. Pretty sure an Upscaler auto crops and pan and scans the image. You can do Pan and Scan on a software DVD player at 2.35:1 to fill 1920x1200, but it crops a good part of the image. Anyways, main reason I feel upscaled external DVD players look better is because I've seen a lot of older/obscure movies on HD cable in 1080 and they look fantastic. Perfect 1920x1080 too ofc.